A FINRA arbitration panel has awarded a former American Airlines pilot $2.7 million after investing in two non-public mortgage funds left him without access to his retirement savings.
The former pilot, Andrew J. Michalak of Easton, Md., first brought his claim to FINRA in September 2009, alleging violations related to investments in Dunham & Associates Daily Mortgage Fund and Dunham & Associates Semi-Annual Mortgage Fund.
Michalak’s troubles came when he invested his entire retirement savings in the two mortgage funds, said attorney Thomas C. Costello of Costello Law Group, who represented Michalak on the case. After redemptions were suspended in 2009, Michalak could not access that money. The investment choice was inappropriate, Costello said, because they concentrated 100% of the retirement money in non-publicly traded funds.
Causes of action brought by Michalak include fraud, negligent misrepresentation or omission, breach of contract, negligence, negligent supervision and violation of the Maryland Securities Act. The amount of relief sought by Michalak was not specified in the filling.
Respondents named in the case denied most of the allegations and presented various defenses, which were not detailed in the FINRA filing.
The respondents include San Ramon, Calif.-based broker-dealer American Investors Company and its advisor Sewell L. Frey Sr., as well San Diego-based wealth management firm Dunham & Associates Investment Counsel, along with the Dunham Trust Company and Dunham Chief Sales and Marketing Officer Salvatore M. Capizzi and Mortgage Fund Manager Holly Lunde. Michalak ultimately withdrew his claims against Lunde in October.
After a five-day hearing, the FINRA arbitration panel ordered DAIC to pay Michalak $1.37 million in compensatory damages within 30 days, plus 2% annual interest starting from Dec. 30, 2008 until payment. With that payment, the panel has ordered Michalak to transfer all of his shares of the Dunham’s daily mortgage fund back to DAIC.
At the same time, FINRA has also ordered AIC and Frey to pay Michalak $1.02 million in compensatory damages within 30 days of the award, plus 2% annual interest starting from Dec. 30, 2008 until payment. AIC and Frey must also pay $300,000 for Michalak’s attorneys’ fees and $15,000 in costs.
Michalak’s claims against Dunham Trust and Capizzi were dismissed by the FINRA panel. The panel also recommended that record of the arbitration be expunged from Capizzi’s registration records.
It is important to note, Capizzi said, that claims made against the one Dunham entity and two of its officers were dismissed before the arbitration proceedings. Michalak is currently still an investor in Dunham’s semi-annual mortgage fund, Capizzi said, owning about $1 million in shares.
Neither AIC nor its lawyer returned calls for comment.